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Editor’s Note: This year we expanded our coverage of the technology companies that do the behind-the-scenes work of powering the technology systems of the world’s major travel companies.
The moves by the two airline groups (plus a similar one by tiny Ukranian International) may have set in motion a global shake-up in how flights are marketed and sold.
Through the surcharges, the airlines intend to coax travel agencies to bypass the global distribution systems and connect directly with the carriers’ reservation data for cheaper fares and more upselling options, like seat upgrades.
This has left a technology gap to fill, and a small Miami-based company named Farelogix is hoping to cash in.
This spring Farelogix signed a multi-year deal to expand the direct connection services it has been providing to Lufthansa Group.
Not everyone’s happy about Lufthansa’s actions. One of the tech middlemen, Sabre, has told Lufthansa Group that its effort with Farelogix and other tech companies violates its contract. The airline group responded last year by suing Sabre in a Texas court and Sabre countersued. The litigation is ongoing.
The moves by Lufthansa Group and IAG — if it is not merely a tactic in negotiations — to shake up distribution cast a light on broader industry trends. Several technology companies are trying to take advantage of the opportunities springing up.
There’s growing interest in two types of technology: software that helps airlines be smarter about what they sell, and software that helps them distribute their inventory directly to travel agencies.
The pioneer of the first solution is ITA Software, which has been offering pricing and merchandising tools for about a decade and didn’t stop when Google acquired it in 2010. Farelogix, Datalex, and other companies offer related services. Amadeus and Sabre, via their airline IT divisions, also offer related systems.
The other part of the tech puzzle — building direct connections — has been the sweet spot of Farelogix, Vayant, Travelfusion, and other companies. Vayant, for instance, says it provides a part of the software solution for both Lufthansa and British Airways.
The face of the change face of distribution
Farelogix appears to have gained the most from the distribution upheaval so far. While it doesn’t disclose its financials, it does say it is profitable and that it has grown its employee count to 175, up from 125 in 2015.
Farelogix has 19 airlines, including American, Emirates, Lufthansa, and WestJet, using its tools to power their direct connections with agencies.
Based on that success, its chief executive Jim Davidson has become the public face of the issue.
News articles often portray Farelogix and its peers as having the end goal of getting the three major tech companies (Amadeus, Sabre, and Travelport — known as global distribution systems, or GDSs) out of the distribution chain.
Davidson says that’s a misunderstanding. “I actually see the reverse. The GDSs need to hurry up and take this capability in-house so they can provide both the traditional offering that they do today or support the new offer directly from an airline.”
“There’s a tremendous value that the GDSs create for that. I think they’re missing out big time on that by not investing faster and heavier.”
We caught up with Davidson to find out the latest on Farelogix and the industry’s future. We edited the interview for brevity and clarity.
Skift: Jim, Farelogix often says “airlines need to control their offer.” What does that mean?
Davidson: In layman’s terms, it means airlines need to be able to set their price and product in a dynamic environment. Historically they haven’t. Which would be unheard of for any other type of retailer. Up until now, airlines have created static prices that are distributed to agencies. That worked well when airline seats were like a commodity, just a cabin and a price. But not for what the airlines want to do now.
Skift: I don’t think an average person will understand what that means.
Davidson: Most airlines have mostly outsourced the work of pricing and distributing their product to others. The general exception is for the seats they sell via their own brand.com sites,
But they’ve outsourced it to third-parties that have outdated technology and are limited in what they can do.
Right now, airlines send their content, either via global distribution systems [GDS] or passenger service systems [PSS], through a series of static filings.
The GDSs or the PSS are basically creating the offers on behalf of the airlines — and quite imperfectly from the perspective of the airlines.
But all of those things that airlines want to do to make their product and brand stand out and to help earn more revenue — seat assignments, meals on the plane — all of those things can’t be statically filed with organizations like ATPCO [Airline Tariff Publishing Co.]
Skift: Airlines have had multiple classes of service and checked bag fees for ages. What do you mean by airlines now want to control their offers?
Davidson: They’ve been constructing price, but not creating offers. There’s a whole deconstruction effort going on around airline product as a way to earn more money and build brand loyalty.
Skift: This is a lot of fuss if it’s just about fare families and upselling.
Davidson: It’s about more than that. Airlines know ultimately who buys from them, and at what price they buy. But what they really want to know is what share of, say, college kids in Florida shopping for tickets in a given week chose their airline instead of a competitors’.
To be a smart retailer you have to really understand what people are searching for. Today airlines don’t have the capability to do that. If they want to react to shifts in market demand, they need this data.
Skift: What does “reacting” mean?
Davidson: “Reacting” means increasing products of services, bundling, opening up buckets of seats for booking etc.
The tech needs to evolve to enable more of a supply-and-demand-type of an activity than just simply filing a fare in some centralized database used by agents and hoping somebody comes and buys your tickets.
Skift: How many airlines control their offer today?
Davidson: I would argue only the low-cost carriers do.
Skift: So now some network carriers are interested in “insourcing” the availability and the pricing from the middlemen tech providers?
Yes. Once you insource, you can get into taking apart or bundling together products or offering certain things to certain people based on what inventory an airline has and who the customer is what other products and services the airline has on any given flight.
Skift: So what needs to change in the technology, in plain English?
Davidson: The tech needs to add the ability to match more of a relevant product with a certain traveler. Say I’m an airline. The third-party systems don’t know how many premium meals I, as an airline, have. They don’t know what my load factor is in my business class. They don’t know what I want to offer this particular business traveler when they’re sending in their frequent flyer number because of her high status.
Skift: What is the technical limitation?
Davidson: The key difference is that the airlines are wanting to set the rules around how they sell their product based on all these new dynamically changing conditions. The other part is some of the airlines don’t even realize who’s searching them right now.
Skift: What do you mean?
Davidson: Now the system of third-party distribution is limited to 25 RBDS [reservation booking designators, or “fare buckets”].
You separate that by two or three cabins, and then you want to try to separate that down within different products within those cabins for different types of corporations or trips. You run out of the capabilities to do that.
Skift: How is the tech improving?
Davidson: Airlines are slowly updating their pricing engines, and that will help.
Today’s new pricing engines don’t have dependencies on filing static fares in a central system. Or at least they can take a filed fare and then supplement it with products and services on a real-time basis based on availability.
Skift: It sounds like a lot of tech systems are needed to control the offer and distribute. But Farelogix doesn’t yet have a full suite of solutions to do that, does it?
Davidson: We are in production with one airline to offer a pricing engine, an availability calculator, a schedule builder.
We have about 10 airlines using our merchandising engine.
Skift: So Farelogix as of today can’t offer the full tech solution, right, to meet the “control the offer” vision you’ve outlined?
Davidson: Again, when it was just price and merchandising engines, Datalex has one, ITA has one. We certainly didn’t invent this.
Again, our industry is responding to a natural progression.
As an airline, I start with the pricing engine, now I’m going to look at a merchandising engine, but now I need to get availability. Anything that the airline can manipulate and control to enhance, offer more choice and give a better product, they’re going to do over time.
Skift: Some critics say Farelogix is just a glorified API [application programmable interface] provider.
You need a better appreciation of what we do.
We support travel agencies with exchange and refund servicing. Priceline, in their call centers wherever they have them around the world, when there’s a booking on United or American it needs to be serviced. I’m talking complex exchanges and refunds. We handle it.
We’re IATA BSP-certified [the Billing and Settlement Plan of the International Air Transport Association] in 107 countries.
We produce more EMDs [Electronic Miscellaneous Documents, used primarily for ancillary sales] in the North American market than all of the GDSs combined.
I’m not trying to say that we do everything because we certainly don’t or aspire to.
Our APIs have to operate with a lot of capabilities if you’re doing services for American Airlines or Lufthansa.
We do a pretty good job versus some of the other APIs that we’re maybe getting compared to.
We invest millions of dollars a year into developing new services all the time for travel agencies through our airline customers.
Skift: In that case, is Farelogix a global distribution system? Shouldn’t Lufthansa hit it with a surcharge as a third-party tech provider?
We do not qualify as a GDS. For one thing, we work for the airline. We don’t work for anybody else.
We don’t have subscriber agreements. We don’t represent hundreds of airlines. We don’t rebate to agencies or have any arrangements with agencies at all.
We don’t have most of those services that GDSs do. We mainly do the components such as the pricing and the availability and the schedules — all of which are an airline function, not a GDS function.
We certainly do profess to be an alternative for an airline to distribute into the travel agency marketplace.
But we don’t do a lot of aggregation… We work for one airline at a time, the exception being those that have a group of airlines like Lufthansa Group. You can, in fact, get the four airlines on our product in that one case
There’s quite a bit of difference. Regarding whether the surcharge should apply or not, I think that’s a foreign argument to me. There are other reasons, but I’ll spare your readers.
Skift: Do Farelogix and its peers still want to bypass the global distribution systems?
Davidson: The industry discussion often equates a lot of what’s going on with GDS bypass. I actually see the reverse. The GDSs need to hurry up and take this capability in-house so they can provide both the traditional offering that they do today or support the new offer directly from an airline.
There’s a tremendous value that the GDSs create for that. I think they’re missing out big time on that by not investing faster and heavier.
No, the idea that we’re going to open up this whole new network that goes around the existing GDSs and travel agencies is silly.
Skift: But that was one of your original ideas, right? Farelogix pivoted away from that.
Davidson: Yeah, in the early days we thought we could do it cheaper, better, faster than the GDSs, especially for the low-cost carriers.
Some airlines will continue to have some part of their distribution mix in a, what I’ll call nontraditional direct, not the website, but a one-to-one relationship with an outlet whether that’s an online travel agency or a large travel management company or a specialty corporate travel agency.
But the majority of that is still going to go through the network of travel agencies and the GDS path.
Airlines don’t want to take over the network of travel agencies.
What airlines want to do is be able to create that offer and send it down through those existing pipes and have it displayed and sold. That has tremendous value for the GDSs.
So I continue to be amazed at why they don’t want to do that or only talk about doing it. I think they can probably create more of a financial opportunity. Who’s to say?
Skift: Amadeus, Sabre, and Travelport all say they can handle rich content, dynamic fare bundles, and other merchandising.
Davidson: The GDSs claim they already have this technology and the question is whether or not they are going to invest in that technology that they claim they already have. Are the GDSs going to allow an airline to send them, rather than the bits and pieces, actually send them the full offer?
Today, they take offers from low-cost carriers. Are they going to do that with a network carrier like a Virgin Atlantic or a Lufthansa or an American when those airlines step up and say, “I want you, instead of just taking my paid seat, I want you to take the whole offer because I want to send a dynamic price down to you on the request.”
Same with the passenger service systems [PSSes].
While I don’t have a specific insight to PSS agreements, what I hear in the marketplace is there’s a lot of concern about PSSs allowing airlines to break out certain functions such as pricing or availability and manage that on their own, and still inter-operate with the rest of the PSS.
Obviously departure control, and revenue management, and all those other things that you don’t want to throw out.
Skift: Let me recap this to make sure we got it: It seems like some airlines that want to have direct connections with agencies can’t be bound by their reservation system provider if it’s the same as the global distribution system provider. Lufthansa and British Airways seem to want to look at independent providers such as Farelogix, Vyant, ITA Software by Google to provide that passenger service system functionality, Farelogix, Vayant, ITA Software by Google, etc.
Davidson: That’s partly right. Though you have to be cautious. The passenger service system [PSS] is more than what I’ll call the creator of the offer. We’re really talking about what has really become offer management.
More and more airlines are saying, “Look, a community pricing model used by the GDSs might not work for me.” You’re hearing things about some charges going up. Airlines also may not want to be dependent on having somebody else decide when they want to build out certain functions that I, as an airline, need.
Airlines are looking at a slice of the PSS, particularly those things that are around the offer, and those are the engines that we’ve talked about before. Your PSS has historically provided that.
Skift: We seem to avoid talking about pricing. Airlines are driven by an imperative to cut costs. It’s not clear to me how they’re cutting costs once everything in total is added up by expanding their tech ecosystem to fulfill the vision you’re spelling out.
Davidson: Again, the advantage we have and that a few others have is that we don’t use the community-based model that companies like Amadeus use.
The idea of the community model is that the more airlines brought on, the unit cost for pricing and, basically, for everything will go down because they’re all going to use these same systems. That works well in a commoditized market. But not in today’s more complicated one.
Skift: The passenger service systems as we know them are going to go out of business?
Davidson: No. I’m not saying that. They work fine for some airlines.
My view is more nuanced. What I’m saying is that some airlines are going to say, “I’m going to manufacture my offer myself under the control of these engines,” whether via Farelogix or Vayant or ITA, Google, or whomever as a tech partner.”
They’ll also keep using the status quo system. WestJet, one of our clients, is doing that today, for instance.
That’s our strategy and what we’re betting on. If it plays out, that’s great. So far we think that certainly is, for the larger airlines, we’re seeing that trend develop.
Skift: But do corporate travel agencies care?
Davidson: They do. What the airline can offer on its brand.com site is generally much more sophisticated than what it can use to sell via travel agencies. But corporate buyers aren’t getting access to a lot of those services that could be negotiated on behalf of what the airline has regarding product.
Skift: Where are you now in terms of the number of agencies that are working with the direct connect services?
Davidson: We have about 6,500 travel agencies that have the capability to use our direct connect gateway to airline products. I don’t have visibility into how many of those agencies are using the direct connects every day. A lot of those agencies, obviously, are using it to make very small numbers of bookings. Others are using it to make and service a lot of bookings.
If somebody goes with one of Farelogix’ direct connects, the only capability of servicing that is through either they have their own servicing capability that they hook the API up to or they use our software solution.
Skift: But agencies aren’t incentivized to go along with this. For example, in testimony last autumn in the US Airways versus Sabre trial, a key executive at American Express Global Business Travel, Mike Qualantone, said that the agency was disappointed with its flirtation with Farelogix’s tools. He called your company “a shell of a GDS” that was “a lightly capitalized company that would never meet Amex’s global or U.S. needs.”
Davidson: Obviously I take a little bit of exception with Mr. Qualantone’s comment. I understand where it’s coming from. I understand the financial incentive that American Express receives.
However, I can also tell you that our longest running travel agency implementation was American Express in Canada. We had integrated rail service and GDS service and Air Canada Direct Connect, and WestJet.
Matter of fact we had to actually turn it off because we couldn’t make it PCI [Payment Card Industry Data Security Standard] compliant.
He certainly doesn’t have any view into our capitalization structure. We’re a very profitable company, growing, and so forth.
Skift: Not PCI compliant? Is that going to be an ongoing problem?
Davidson: Oh no, we’re PCI compliant as a company. That technology was so old, it was impossible to make it. It was a past consulting user interface that nobody wanted to invest in and make it PCI compliant.
Skift: We never hear about major online travel agencies working with Farelogix. What explains the lack of agency interest there?
Davidson: We’re connected to about 60 OTAs around the world.
Just to be clear, Farelogix itself doesn’t have any contractual relationship or subscriber relationship with travel agencies. If an airline wants to hook up an OTA, like if American wants to hook up to Priceline, they simply give us a work order and we hook it up.
We don’t actually have an agreement with the agency.
We are just a technology provider.
There are a lot of terms in commercial relationships that penalize travel agencies for going rogue, if you will. There are “productivity clauses.”
I bet — if you strip everything away — there are a lot fewer technology relation issues than there are commercial issues.
Skift: The immediate topical point is Lufthansa and now British Airways adding surcharges and building so-called direct connect. From the view of corporations and agencies, isn’t this just a way to negotiate harder, gain leverage in negotiations and drive down margins?
Right now the status quo helps agents. The airlines pay the GDSs fees, which they partly rebate to the agents. Agents may see less margin in the world you’re describing. It might not seem very attractive to the typical agency to have to do the learning of bringing on this new workflow and then face the potential of having lower profit as a result.
Davidson: Sure. I actually agree. Again, I think this is where I think the GDSs and to some degree, the PSSs have fallen asleep a little bit.
But Amadeus’ and Sabre’s divisions have been building out their PSS tools and engines in a way that allows the airlines to handle next-generation distribution, they say, but they need to do more.
They haven’t either decided or have decided not to invest heavily in the idea that airlines are going to have de-commoditized products and add-on products.
Fare families were not the fad that GDSs thought they would be when they first appeared a decade ago. Dynamic packages and pricing are becoming realities.
The problem is you’ve got an intermediary, the GDS, that’s trying to force people, through inertia, to stay in a world that a lot of airlines don’t want to stay in.
I understand there’s investment required there by the GDSs and airlines don’t want their GDS fees going up to pay for it.
As long as that investment is not made it’s like trying to straighten out a river. Industry behavior is going to go where it’s going to go.
You have these airlines saying, “I’m not going to wait any longer.” Lufthansa is saying, “I’m going to take it upon myself. Maybe I can do without a full-content agreement. I’m going to work with not just Farelogix but other partners to try to see if we can establish another river and then maybe it will force others to do the same.”
Skift: Sill, the persuasiveness of creating another river depends on travel agencies coming on board. A little while ago you said that … I think that Farelogix had renewed its investment in travel agency services. You had put that on hold.
Skift: Most major airlines can’t differentiate their offer now because they are limited by their full content agreements with the middlemen. If they break their full-content agreements, they’ll have to pay more on the remaining transactions that still go through the third-parties. That’s a financial disincentive to act.
Davidson: I don’t think full content deals are going to get in the way of this. The GDSs are going to get there, where they’re going to be able to actually display this.
Most of the engines that Farelogix is selling airlines are using on their websites because they control that and I just don’t have to worry about full content deals there.
This is airlines wanting to simply use the GDS pipe to get to their proxy, which happens to be the travel agency, with a better offer than they have today.
Skift: How can Farelogix and its peers like Travelfusion, Vayant, and others, make headway in this given all of the commercial odds against them?
We made a lot of headway. We have reinvigorated our work into the travel agency community based on our airlines are being more successful.
There’s a lot of things that the GDSs have done that have been helpful to agencies that we have to look at and say, “Maybe we can do it a little different way.” Yeah, there’s a lot of investment we put in there.
Part of it is once that commercial relationship gets intact we want to make sure that it’s a very efficient technology relationship. The GDSs have been around for a lot longer than we have in terms of the travel agency. Again, I think the more investment we continue to put into the travel agencies the better the products become. It just becomes a bit of a cycle.
Yeah, just because an airline has figured out the commercial relationship doesn’t mean it’s an absolute slam dunk. If they’re using an API, and a lot of these guys are … HRG [Hogg Robinson Group] talked about some of the investments they’re making in their platform so they can hook into the APIs. We’re doing the same thing.
This is when you’ve had a market dominant presence for 20-some years. It’s going to take a little bit of time for the penetration to go. The advantage we have is it’s a lot newer technology than what some of the GDS agency stuff was built on. To make changes in a UI [user interface], we do release cycles every month.
That’s not how the GDSs work. It’s very hard for them to do that.
Skift: It’s unclear how the commercial model appears to support this industry evolution. Sabre predicts that U.S. airlines won’t level booking surcharges, and the argument is plausible. If airlines don’t impose some surcharge that encourages agents to make the move, given all the commercial relationships, isn’t there going to be this real fog and headway that prevents the Farelogix’s of this world to successfully offer their new technologies?
Davidson: Let’s not pretend we don’t have history here. There are two ways that airlines look at wanting to get their product distributed fairly, equally, and to the best ability and pay fair compensation for that. One is a carrot and a stick, and clearly, a surcharge is a bit of a stick. The other is content, and that’s more of a carrot.
As airlines start creating relevant and dynamic content, and I’ll even use the word personalized — but I don’t use that in terms of necessarily down to an individual, Amazon- or Netflix-style — offers that I think that the travel agency community is going to see much more value in those and will start to create a value proposition that will actually, I think, put pressure on the intermediary technology companies, like the GDS, to deliver it.
Again, we always go to this argument that somebody is trying to get rid of the GDSs. Not true. There’s discussion on price versus value. There’s discussion on technology capabilities.
I don’t think for a minute any airline wants to completely replace and deal directly with every travel agency in the world. I just don’t see that happening. I think there’ll be some one on one relationships.
The bigger challenge is airline distribution has changed significantly.
Products have changed significantly, and we have a current market-dominant technology providers that have not given the airlines what they want. There’s going to be a lot of reaction to try to make that happen.
Skift: Delta Air Lines experimented with corporate bundles, which are related to this, around 2015 and seems to have stopped using them. It seems like the broad idea is you offer tailored packages of products and services to corporate accounts. Again, it seemed like the issue is not a technical challenge. There were almost no takers from corporates, for presumably commercial reasons. Why is the corporate bundle not popular?
Davidson: I remember the Delta thing, although Delta just came out with this ability to buy upgrades — not tied to the entire journey.
Airlines have an opportunity to go into corporate America and start dynamically pricing some of that.
If we just look at these little things that happen, I think some of the early stuff does fail. It’s either ahead of its time or we’re just not ready for it.
Unfortunately, the PSSs are going to require quite a bit of investment and the makers of the legacy PSSs, like Amadeus and Sabre but also others, are looking for figuring out how that’s going to be paid for. I get that, that’s a big deal.
Skift: Delta’s executives have said, though, that they’re not interested in doing direct connects or there’s a line to how far they were going to go.
Davidson: Well… they’ve certainly been very vocal, and I would never speak for Delta, but they’re very vocal about their channels and how they want to deal with those challenges.
My only point was you’re seeing them focus on their product, and whether that’s the same product for everybody or now a different way to look at products in terms of getting the specific segments of the population is going to be interesting.
That’s a long way from merely charging for bags as far as I can tell. That’s what’s exciting about that.
Skift: We’ve talked a lot about the technological issues. But those are inter-related with management issues. Airlines are split into groups — revenue management, distribution, e-commerce/website, and so forth — they often don’t work together smoothly, which complicates the adoption of new systems and business models.
Davidson: What’s happening now is that — certainly starting with a few airlines probably 10 years ago, and mostly on the brand.com airline website — the airlines started using ITA Software and other tools to have a little more control.
They get the concept.
Merchandising has been escalating over the last five years. The executives are willing to invest to support where the growth is.
Skift: OK, let’s recap. You say airlines want to “control their offer” and to do that they need better technology. You say there’s this market gap that companies like Farelogix are coming in to try to provide the technology and win the business instead. Is that right?
Davidson: That’s exactly right.
Farelogix didn’t invent controlling the offer, but we certainly opened that door and ran through it. We have invested heavily in building out these engines that give airlines the ability to do that.
Skift: Skift has recently interviewed the CEOs of the major GDSs, and they’re quite sanguine about their futures, unlike you.
Davidson: I’ll talk about Amadeus and Sabre because those are the ones that tend to be written about the most, I think they realize the challenges.
I’m sensing more openness to some differing business models which, to me, tells me that they’re listening to their customers a lot more.
The burden, probably more for Sabre than Amadeus, is you’re working with systems that are a bit older and require more love, care, and maintenance to bring them through a transitional period. That’s not an easy thing to do.
I’m reading more and more about those guys understanding what investment it will take — understanding the diversification.
Already you see a lot of diversification in Amadeus, for example. That’s healthy. Again, as much as I banter with the GDSs, I have a tremendous amount of respect for what they can offer the value chain.
The fact that they don’t offer it fast enough, and deep enough, is the sole reason that I exist. I’m happy with where they are.
Check out other articles in Skift’s Travel Tech CEO Series, including interviews with the CEOs of Amadeus, Sabre, Travelport, and SITA..